In part two of our Planning Grid series, we focus on financial outflows—essentially, the money that leaves your financial system. There are two primary categories of outflows: taxes and lifestyle costs. Let’s break them down.
Taxes: Planning and Structure
Effective tax planning is critical to managing outflows. This involves understanding your tax structure, whether you’re taxed as an individual or a business. Do you operate under an LLC or an S-Corp? Are your taxes based on income, capital gains, or other sources? It’s also important to consider when you’re paying taxes—whether quarterly or annually—and how cash flow should be planned around these obligations. Additionally, knowing your effective tax rate is essential. Unlike your tax bracket, which fluctuates with income, the effective tax rate reflects the true cost of taxes on your lifestyle.
Lifestyle: After-Tax Spending
Lifestyle costs represent your personal spending, and these are after-tax expenses, meaning taxes must be factored into your earning needs. For instance, if you need $10,000 to fund a purchase and your effective tax rate is 30%, you must earn approximately $15,000 to cover the expense. This cost-versus-earn dynamic plays a significant role in lifestyle management.
Maslow's Hierarchy of Needs: Aligning Financial Planning with Life Goals
At Haddam Road, we align financial planning with Maslow’s Hierarchy of Needs—a psychological model that translates well into the financial world. At the base of this hierarchy are essential needs like food, clothing, and shelter, progressing through relationships and community, and ultimately leading to self-actualization or, as we call it, a lifestyle leading to meaning. Our goal as financial planners is to help you navigate this journey, ensuring your financial decisions support your progression up the hierarchy.
By understanding these outflows and planning around taxes and lifestyle needs, we can help you build a financial plan that brings clarity and purpose to your life. For a deeper dive, download our White Paper on the Haddam Road Advisors Financial Planning Standard of Care, which covers 70 different financial planning issues.
Stay tuned for our next post, where we’ll discuss what you own—and it’s not just dollars.
Planning Grid: What You Own and Its Role in Financial Planning
The Path Forward - Part 3
